Here’s Why Coca-Cola Shares May Fizzle After Muhtar Kent’s Exit

On Friday, after the soda giant announced that CEO Kent will step aside effective May 1, shares of the maker of Coke ko rose $1 to close at nearly $42, up nearly 2.5%. But the soft-drink maker’s investors shouldn’t smile too broadly at Kent’s exit.

Coca-Cola’s new CEO, James Quincey, has a lot of work to do, as my colleagueshave pointed out. The company has to abandon its strategy of putting all of its brand equity into its most famous product. Quincey will also have to deal more directly, again likely through product diversification, with consumers and increasing numbers of lawmakers who have grown to view high-sugar foods with distaste. On top of that, he will have to contend with Kent’s stock market legacy. While Coca-Cola’s stock has lagged a bit recently, all in all its performance has been pretty good, especially giving the headwinds facing the business.

It may sound surprising, especially given the fight with shareholders over his pay two years ago, but Kent has been pretty friendly to investors. He took over the CEO job in July 2008. From then through the end of last month, shares of the company are up 57%. That’s trailed the S&P 500 in the same time, which is up 72%. But when you add in the company’s above-average dividends, the stock’s total return jumps to 103% during Kent’s run, only slightly behind the S&P 500’s 106% over the same time period.

Kent has certainly made operational mistakes—and PepsiCo CEO Indra Nooyi, though her embrace of snack goods, has put Coke’s biggest rival on a better growth path. But he was a very good manager of capital. The high dividend is big part of that: Kent decided to use the company’s cash flow to reward shareholders, rather than going for growth at all costs. More recently, after initially resisting the move in what now seems like a misstep, Kent has pushed to spin off the company’s bottling divisions. That will keep the company asset-light, making it as much like a high-margin tech company as possible. Indeed, Coca-Cola’s net income margin is expected to near 25% next year. (Microsoft’s net margin in its most recent quarter: 22%.)

But all of that will make the job of keeping the company’s shares moving up even harder for Quincey. Coca-Cola’s sales are expected to drop by $6 billion, or 15%, next year. Part of that is by design, since it represents revenue lost from selling off the bottlers. Still, no matter the explanation, stock investors don’t tend to take well to declining sales. On top of that, Coca-Cola’s stock at this point isn’t cheap. The shares’ price-to-earnings multiple of 22, based on this year’s earnings, is slightly higher than Dr. Pepper Snapple’s dps P/E of 20. It’s basically the same as Pepsipep, but, again, that rival has done a better job of diversifying. What’s more, Coca-Cola’s high dividend yield, about 20% higher than Pepsi, drains cash away from investments elsewhere, complicating Quincey’s job.

In addition, Coca-Cola gets more than half of its sales overseas, a vulnerability at a time when a rising dollar will make it harder for U.S. companies to make money outside of the U.S. and when President-elect Donald Trump looks to be shaking up international trade.

So don’t be surprised if after Kent, Coca-Cola’s investors get left owning a stock that turns out to be, well, flat.

Questions on Brand as Coke’s CEO Steps Down

Today’s announcement that Coca-Cola CEO and chairman Muhtar Kent will step down in May after eight years at the helm of the giant beverage company was not a big surprise. Nor was the news that Coke president and COO James Quincey will replace him; he has been the expected successor for some time and is well regarded by Wall Street.

But the changeover also represents something else; the departure of a man who exemplified a strategy that almost every global brand followed, but that may no longer be relevant today. It was the notion that one brand identity could mean the same thing to people all over the world—and that increasing the scale and power of that brand was the single most important thing that a big consumer products company should do.

It’s a problem faced not only by Kent and Coke but also by virtually every single major company in the food and drink category. (Technology, where Apple and others have achieved brand ubiquity for now, is an exception to this trend). In this era of personalization, where your apps, your mattress and, yes, your cola choices are customized, being the biggest and most efficient doesn’t necessarily win. This—plus the increasing desire to avoid sugary drinks—helps explain why Coca-Cola has struggled, with annual revenues falling by $4 billion in the past three years. Says Jim Stengel, head of branding consultancy the Jim Stengel Co. and former global marketing head at Procter & Gamble: “This is in my mind the biggest issue for global, scale-oriented CPG [consumer packaged-goods] brands: How to compete in a post-scale economy? The answer is not obvious or easy as it challenges the foundation of their business model.”

This new world also requires new leadership. Heads of global consumer brands will need to figure out the magic link between giving customers choice—Coke has tried to do this in recent years by, among other things, offering customizable soda fountains—and making such options cost-effective to produce. P&G is one company facing similar pressures–as is McDonald’s. Coke and Kent are to be congratulated for pulling off a (so far) seamless CEO succession. But whoever the CEO is, the big brand challenge isn’t going away.

5 Things to Know About Coca-Cola’s CEO Change

On a day when the beverage community came together for the industry’s Beverage Digest Future Smarts conference in New York City, Coca-Cola managed to dominate the news by announcing long-serving CEO Muhtar Kent will step down in May after serving in the role for eight years.

Kent will be succeeded by company veteran James Quincey, who most recently served as president and chief operating officer. The transition occurs almost immediately after a Coca Cola ko shareholder meeting in April. Kent, who on Friday morning described the transition as the most orderly CEO change in Coke’s history, will remain chairman of the board.

Shareholders didn’t seem to fret the CEO change. Coke’s stock is up over 2% in Friday morning trading. Marcos de Quinto, Coke’s chief marketing officer, coincidentally spoke first at the Beverage Digest conference. When asked about why Quincey is the right executive to run Coke now, de Quinto had nothing but praise.

“He is not only probably the best professional we can have in this moment. As a person – he is fantastic,” de Quinto said. “He is bright, and the way he treats people, there is no one like James.” De Quinto went on to laud Quincey’s strength as an expert in operations, a good sense of marketing, and support from Coke’s core bottling partners—who help distribute the beverage giant’s portfolio of sodas, waters and juices.

Still, there will be challenges ahead. Here’s five things to know about this major CEO change in the world of Big Food.

Coca-Cola has underperformed under Kent

A peek at the latest annual filing by Coke shows that the company’s shares have underperformed both a peer group index and the S&P 500. If an investor were to put $100 into Coke’s shares on December 31, 2010, that investment would be worth $151 apiece by the end of 2015. But returns were far stronger for the peer group index—a basket of stocks that include rivals like PepsiCopep and Dr Pepper Snapple dps—with a $100 investment over the same timeline appreciating to $218. Revenue has also faltered: it stood at $48 billion in 2012 but dropped to $44.3 billion last year. Revenue is down a further 5% for the first nine months of this year.

Kent inked deals; expect more to come

Under Kent, Coca-Cola announced a slew of deals—most notably moving to acquire some of the company’s big bottling partners after decades of keeping bottlers separate from the marketing and R&D behind brands like Coke, Sprite and Minute Maid. In 2010, Coke went forward with a deal to buy the North American operations of bottler Coca-Cola Enterprises, giving it almost full control of bottling in that region. It also took stakes in other beverage companies like Monster Beveragemnst and Keurig Green Mountain—the latter investment gave Coke a tidy $25 million profit after Keurig was sold.

More investments under Quincey would likely take the form of a small, startup investment followed by a full-on takeover later. That’s how last month, PepsiCo bought KeVita and Dr Pepper Snapple acquired Bai Brands. “We tend to believe that given James’ background and significant deal experience, he could accelerate Coke’s growth even further through stepped-up acquisitions over the next several years,” wrote Wells Fargo analyst Bonnie Herzog in a research note.

Of course, Coke itself could become a target. Analysts have said beer giant Anheuser-Busch InBev, which recently swallowed SABMiller, could look to Coke or PepsiCo next.

Coke needs to win market share in declining soda market

In the core U.S. market, carbonated soft drinks sales have slid for 11 straight years, hurting all the major players as consumers are drinking more bottled water, flavored waters, juices and other beverages they deem healthy. Coke hasn’t been immune from that trend: last year Diet Coke volume slipped 5.6% while the namesake brand’s drop was 1%. Analysts and beverage experts agree this trend will almost certainly continue, and there has been criticism from some that the company has been too slow to diversify beyond carbonated soft drinks, which still contribute 75% to sales. Beyond diversifying through deals or internal innovation, Coke needs to try to win market share in a declining market.

Confront new taxation

As health experts have spent years lamenting the high sugar and artificial flavors found in many mainstream sodas today, governments have taken note and recently deemed the soda industry an easy taxation target. High taxation has for decades impacted the alcohol and tobacco industries, both viewed as “vices” among consumer products. Now, the soda industry is seeing itself a target as well. The reason? Sodas have been linked to increased risk of obesity, heart disease and other negative health effects, so government officials are lauding taxation as a way to cut consumption to help public health.

Mexico introduced a 10% tax on sugar-sweetened beverages in 2014 and this year, cities in the U.S. followed suit. Philadelphia became the first major city to pass such a tax earlier this year. On election day, four more cities—including San Francisco and Oakland in California—also approves taxes on sugar-added beverages. More taxes from local governments could be in the pipeline. And sodas may have limited wiggle room to raise prices like tobacco players did in the face of taxation, as there are plenty of beverage alternatives to soda.

Quincey has got a global view

One of the most important skills Quincey brings to the table: plenty of international experience. When he joined the company in 1996, his first role was director of learning strategy for the Latin America Group. In the subsequent years, Quincey held various roles in Latin America, served as president of the Mexico division, and also worked in Europe for years, most notably leading Northwest Europe and the Nordics regions. He also played a key role leading the merger with Coca-Cola Enterprises and other European bottlers.

At the Beverage Digest conference, analysts said the appointment was more a question of when—not if Quincey would get the title. “My understanding is he is a real get-it-done guy,” said Caroline Levy, a beverage analyst at CLSA. “As a long term investment, Coke is really interesting, but in the near term there are some challenges.”

Coke CEO Muhtar Kent Is Stepping Down

Coca-Cola said Muhtar Kent would step aside as chief executive on May 1 after about nine years at the helm, and be replaced by Chief Operating Officer James Quincey.

Kent, 64, will continue as chairman, the company said.

Quincey, 51, joined Coca-Cola in 1996 and became chief operating officer in August 2015.

His appointment as CEO was given a vote of confidence by Warren Buffett, CEO of Berkshire Hathaway Inc, which is Coca Cola’s largest shareholder.

“I know James and like him, and believe the company has made a smart investment in its future with his selection,” Buffett said in a statement.

The move comes at a time when Coca-Cola is building its non-carbonated drinks portfolio, cutting costs by selling its bottling operations and stepping up efforts to reduce sugar in its beverages to counter slowing sales.

Coca-Cola still gets about 70 percent of its volume sales from fizzy drinks.

The company’s shares were up 1.4 percent at $41.55 in premarket trading.

PepsiCo To Launch Premium Water Brand LIFEWTR

PepsiCo will next year launch a premium-priced bottled water called LIFEWTR, adding a new brand to the company’s portfolio that plays to strengthening consumer interest in healthier beverages.

The food-and-beverage giant confirmed to Fortune that it will debut LIFEWTR at an industry conference in New York City. A purified water that is pH balanced with electrolytes, the brand will start appearing on retail shelves across the U.S. in February 2017.

“We are starting to see water play a greater role in the repertoire of a consumer’s beverage consumption,” said Brad Jakeman, president of PepsiCo’s Global Beverage Group. “I think we are seeing a secular and irreversible trend toward healthier beverages.”

Industry data suggests Jakeman is right. Since 2004, bottled water volume has more than doubled from 1.8 billion cases to almost 4 billion last year, industry observer Beverage Digest reports. Over that same period, carbonated soft drinks have shed 1.5 billion cases of volume. Though soda sales still represent 55% of the total liquid refreshment beverages market—PepsiCo pep and peers like Coca-Colako can see the writing on the wall.

In recent years, consumers have been consuming less soda in favor of bottled water, flavored waters, and other beverages that are seen as healthier and have fewer artificial ingredients. As sales of core soda brands like Pepsi, Coke and Dr Pepper decline, beverage companies are pivoting. Often, they scoop up beverages that are in better-performing categories. That explains why PepsiCo and Dr Pepper Snapple dps bought two startup brands on the same day in November—sparkling probiotic drink maker KeVita and antioxidant beverage producer Bai Brands, respectively.

The launch of internally developed brand LIFEWTR also contributes to a dramatic makeover PepsiCo vowed this fall. The company is promising that at least two-thirds of the company’s global beverage portfolio volume would have 100 calories or fewer from added sugars per 12-ounce serving. LIFEWTR, of course, fits perfectly into this promise as it is a bottle of water—which of course has zero calories and no added sugar or preservatives.

The launch of LIFEWTR is especially intriguing because PepsiCo has a big, bottled water brand already. It owns Aquafina, which is one of the company’s 22 “billion-dollar brands” and already dominates the $185 billion global bottled water market.

Bottled water is a segment that is splintered on price and branding like all other beverage categories. Cases of water are sold on the cheap for slim margins and there is a separate, “premium” segment where consumers are willing to spend more for a better tasting drink encased in a fancier bottle.

The premium water market is worth $2.8 billion in the U.S. alone, dominated by Coca-Cola’s Smartwater (the brand beloved by actress Jennifer Aniston). Premium waters come with higher price points, though they also require more marketing because they are more often sold in single serving, while bigger brands like Aquafina get a lot of business from bulk case sales.

“What we see developing is a premium water segment of the water category, driven heavily by millennials,” said Jakeman. He said those consumers want sleek bottle designs and labels, as they view the product almost as a fashion accessory. “It is an important part of people’s image,” Jakeman claims.

To differentiate LIFEWTR from Smartwater, Perrier and others already on the market, PepsiCo developed a label that will change several times a year and feature different artists that have a background in mediums like graphic design or photography. The artists that contributed the initial LIFEWTR labeling designs were mural artist MOMO, transatlantic duo Craig & Karl, and large-scale painter Jason Woodside.

“We believe the biggest equity of this brand is the label,” said Seth Kaufman, chief marketing officer of PepsiCo North America Beverages. He contends that the creative labels plays strongly into today’s social-media driven culture. LIFEWTR, he says, “has a beautiful piece of art on it. We think it’ll connect with consumers on a more inspirational way.”

“Smartwater has done a good job in the premium water space,” said Duane Stanford, editor of Beverage Digest. “It makes sense [PepsiCo] would want to be a player in that category.” While Aquafina is also a bottled water, Stanford and PepsiCo executives both thought that it made more sense to create a new brand rather than try to sell consumers on the idea that Aquafina is “premium.”

PepsiCo’s move to internally develop the brand rather than buy an existing rival differs from what Coke did when it purchased the maker of Vitaminwater for $4.2 billion in 2007. But the result, PepsiCo hopes, ideally will be the same. Jakeman said PepsiCo wants LIFEWTR to achieve a billion in annual sales someday—though he declined to outline a timeline for when that could occur.

“What I think is really smart about LIFEWTR is that it has a much more authentic connection to the world we want it to be connected to—art, fashion and design,” Jakeman said. “The brand’s purpose is to help emerging artists make it and be popularized and get into pop culture.”

And if it helps PepsiCo sell more bottled water in the process, shareholders won’t sweat it.

Walmart, McDonald’s Among America’s Most Gay-Friendly Employers

The nation’s largest food and beverage manufacturers—including PepsiCo, Kellogg and General Mills—are winning high marks for recognizing their LGBTQ work force and adopting inclusive policies for those employees. That was the finding of a new report by the Human Rights Campaign, a national LGBTQ civil rights advocacy group.

The report evaluated 1,043 companies based on whether they have inclusive benefits and protections that promote equality for LGBTQ (lesbian, gay, bisexual, transgender, and queer/questioning) employees, and it found that large consumer product firms score particularly well. Of the 517 U.S. companies that earned 100-point scores, 72 were from the food, beverage and grocery sector.

“From cereal staples to family restaurants, the companies behind the brands that feed America have demonstrated that their LGBTQ workers and families are a priority when it comes to ensuring equality across their policies and benefits,” said Deena Fidas, Director of the HRC Foundation’s Workplace Equality Program, in a statement.

Food makers like General Mills and Coca Cola were among some of the early leaders as it relates to embracing gay rights and because some of the larger companies in that sector led the charge, according to Deena Fidas, director of workplace equality programs at HRC. She said others followed suit quickly to stay competitive as it relates to attracting and retaining talent. LGBTQ shoppers are also highly aware of what brands support their community—and will loyally spend money to support corporations they view as allies.

More broadly, big corporations have proven to be a helpful ally in helping steer legislation that favors gay rights—while also being vocal when the government considers laws that are considered discriminatory. Big business was an active voice opposing anti-gay bills that have the surfaced in Arizona, Indiana, and North Carolina, to name a few notable examples.

In 28 states, it’s still legal to fire a person for being gay, and gay rights groups are worried about the incoming Trump administration. Donald Trump has said he’ll overturn all of President Obama’s executive orders, including one that bars anti-L.G.B.T. discrimination by federal contractors.

“Even in the face of relentless attempts to undermine equality, America’s leading companies and law firms remain steadfast and committed to supporting and defending the rights and dignity of LGBTQ people,” said HRC President Chad Griffin.

The HRC report says that more than 90% of the rated businesses have embraced sexual orientation and gender identity employment protections for their U.S. and global operations. A majority of the businesses (86%) offer education and training programs that include definitions and/or scenarios on gender identity in the workplace, while almost 400 businesses have also adopted guidelines for gender transition.

The report said the total number of employers with a top rating for the 2017 index was the largest jump in top-rated businesses in a single year since in the 15-year history of tracking done by the HRC.

This Coke Bottle Takes Selfies While You Drink

Coca-Colako is feeding our selfie addiction with its new “selfie bottle.”

The bottle’s base is fitted with a camera so that when you tilt it at 70-degrees, it automatically snaps a photo of you taking a swig. More importantly, you can immediately share said photos to Snapchat, Facebook, or Instagram. According to Business Insider, Israel-based innovation agency Gefen Team designed the bottle for the Coca-Cola Summer Love campaign, the biggest outdoor brand event in Israel.

“Users tag themselves and their friends in photos on Coca-Cola’s social media assets,” Gefen Team told Business Insider in a statement. “It really does the trick and makes the partygoers more present and active during the event, knowing they can share their special moments just by drinking.”

According to InfoScout, a website that analyzes consumer receipt data, most Coca-Cola customers are aged 45 or older. So this push into social media could be the brand’s attempt to win over millennials. However, it’s uncertain whether or not the selfie bottle will stick around after the Summer Love campaign event.

Michael Bloomberg Drops $18M for His Crusade Against Sugary Sodas

Former New York City Mayor Michael Bloomberg has donated $18 million to two separate ballot initiatives in Bay Area cities that are seeking soda taxes to discourage consumption of the sugary drinks.

A Bloomberg adviser confirmed to Fortune that Bloomberg had poured money into the ballot initiatives in San Francisco and Oakland that seek approval to enact a one-cent-per-liter excise tax on beverages with added sugar. The figures—$9.1 million given to the effort in Oakland and $9.3 million in San Francisco—were first reported by The Los Angeles Times.

If approved, the cities would be the largest to approve taxes on sugary beverages since Philadelphia became the first major American city to do so in June. Bloomberg supported that initiative in Philadelphia by putting $1.6 million during that effort (the soda industry poured in millions more to defeat the effort).

The move by major American cities to approve or at least consider taxes on sodas suggests the industry is becoming an easier target for local governments as they look to raise more funds in a way that won’t upset their constituents. Tobacco makers, alcohol producers, and the hotel and gambling industries have all faced their own fair share of headwinds on the tax front.

Bloomberg has long targeted the soda industry. Back in 2012 when he was still mayor of New York City, his administration sought to cap soft-drink sizes and some retail establishments as a way to curb intake. The move was part of Bloomberg’s efforts to focus on public health. Thought it won approval from the Board of Health, the big-soda ban was later rejected by the state’s highest court in 2014.

When Philadelphia approved its soda tax over the summer, Bloomberg publicly lauded the effort. In a web post, he congratulated Philadelphia mayor Jim Kenney for “standing up to the beverage industry and doing what’s right for the people of their city.” Bloomberg also added he’d publicly back additional efforts by governments to consider similar actions.

“I will continue working to ensure that cities and nations pursuing these anti-obesity strategies get the support they need to level the playing field with the soda industry,” he wrote in June.

The narrative against soda is resulting in some promises to change the formula of those beverages. PepsiCopep and Coca Colako both made promises last month to step up efforts to reduce the amount of sugar that’s found in their beverages, responding to pressure from consumers and public policy advocates.

These changes are needed, as soda industry sales have slumped for 11 consecutive years and consumption levels are at their lowest point since 1985. The industry has found itself out of favor as consumers seek beverage alternatives to soda that they deem healthier, notably juices and flavored waters.

Meanwhile, trade organization American Beverage Association has come out against past soda tax initiatives. It called the Philadelphia effort a “regressive tax that unfairly signals out beverages—including low- and no-calorie choices.”

“We oppose taxes that discriminate against our products,” William M. Dermody Jr., vice president of policy at industry organization American Beverage Association told Fortune. “We disagree that our products are driving obesity rates. We feel there are other ways to tackle the issue of obesity and we are actively working on those with members of the public health community.”

American Beverage Association says taxes like these hurt consumers and local businesses, affecting lower- and middle-class consumers far more than wealthier shoppers. Dermody added that there is no evidence that these taxes don’t improve public health.

Japan’s Kirin Enters Distribution Talks with Coca-Cola Bottlers

Japanese beverage company Kirin Holdings said it is in talks with Japan’s two Coca-Cola bottling companies, Coca-Cola East Japan and Coca-Cola West, on cooperating in distribution and procurement through a capital tie-up.

“We are discussing the matter with Coca-Cola group and nothing has been determined at this point,” Kirin kiri said in a statement after the Nikkei business daily reported that they are in negotiations.

“We are looking at cooperating in distribution and procurement, a Kirin spokesman said. The agreement may be concluded before the end of the year, the Nikkei reported.

Kirin is looking at cross-holding shares in a new entity formed by the merger of Coca-Cola West and Coca-Cola East Japan, while Coca-Cola ko through its Japan unit will hold a stake in Kirin’s beverage unit, the paper said.

The two Japanese Coca-Cola companies, bottle and distribute Coca-Cola drinks in Japan and manage networks of vending machines selling the beverages. The companies are business affiliates of Coca-Cola Co but are not subsidiaries.

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The two Coca-Cola bottlers, in separate statements, confirmed that talks were underway, but said no decision had been made.

Kirin’s shares gained 1.6% in morning trading in Tokyo, with Coca-Cola East Japan rising 5.5% and Coca-Cola West up by 4.8%. That compares with a 0.2% decline in the benchmark Nikkei 225 index.